In re Fernandez-Rocha

• Decision Date: 12 June 2006
• Docket Number: No. 06-10159 Non-Argument Calendar.,06-10159 Non-Argument Calendar.
• Parties: In Re: Luis FERNANDEZ-ROCHA, MD, Debtor. Jorge L. Guerra, Gayle L. Guerra, Plaintiffs-Appellants, v. Luis Fernandez-Rocha, MD, Defendant-Appellee.
• Court: U.S. Court of Appeals — Eleventh Circuit

451 F.3d 813

In Re: Luis FERNANDEZ-ROCHA, MD, Debtor Jorge L. Guerra, Gayle L. Guerra, Plaintiffs-Appellants, v. Luis Fernandez-Rocha, MD, Defendant-Appellee.

No. 06-10159 Non-Argument Calendar.

United States Court of Appeals, Eleventh Circuit.

June 12, 2006.

Paulino A. Nunez, Jr., Rodriguez, Tramont, Guerra & Nunez, P.A., Coral Gables, FL, for Plaintiffs-Appellants.

Paul L. Orsham, Duane Morris LLP, Miami, FL, for Defendant-Appellee.

Appeal from the United States District Court for the Southern District of Florida.

Before CARNES, HULL and PRYOR, Circuit Judges.

HULL, Circuit Judge:

Appellants Jorge and Gayle Guerra (the "Guerras") appeal the district court's order affirming the bankruptcy court's dismissal of their adversary complaint against Dr. Luis Fernandez-Rocha (the "Debtor") based on his failure to comply with Florida's Financial Responsibility Act, Florida Statutes § 458.320. On appeal, the Guerras challenge the bankruptcy court and district court's determination that the debt in issue is dischargeable in bankruptcy. After review, we affirm.

I. BACKGROUND

A. Death of Veronica Guerra

This appeal arises out of the tragic 1996 death of the Guerras' newborn daughter, Veronica Guerra. During Mrs. Guerra's pregnancy, the Guerras had agreed with the Debtor that he would deliver their baby. They further agreed that, in the event the Debtor was unable to deliver the Guerras' baby, one of his partners would attend to the birth and Dr. Lourdes Ramon, a junior associate of the Debtor's, would not be involved. Nevertheless, when Mrs. Guerra was admitted to the hospital, Dr. Ramon attended to the birth. According to the Guerras, as a result of Dr. Ramon's negligence, Veronica Guerra sustained injuries during the delivery and died eleven days later.

B. State Court Action

In Florida state court, the Guerras filed a malpractice action against both the Debtor and Dr. Ramon. On February 13, 2004, the jury in the state court action returned a verdict in favor of the Guerras and against the Debtor and Dr. Ramon. Specifically, the jury found: (1) that Dr. Ramon's negligence caused Veronica Guerra's death; (2) that there was no negligence by the Debtor with regard to Veronica Guerra's death; but (3) that the Debtor's breach of contract was a legal cause of Veronica Guerra's death. The jury awarded the Guerras $4.2 million, and the Florida state court entered final judgment against the Debtor.

C. Bankruptcy Case and Adversary Proceeding

Meanwhile, on December 1, 2000, the Debtor had filed a voluntary petition for relief under Chapter 7 of Title 11 of the United States Code (the "Bankruptcy Code"). On February 26, 2001, the Guerras filed in the bankruptcy case an adversary proceeding against the Debtor. The Guerras' adversary complaint asserted that, pursuant to Florida Statutes § 458.320, the Debtor was obligated to establish a fund to pay claims arising out of his rendering of, or failure to render, medical care and services, and that the Debtor had a fiduciary duty to his patients to maintain a claims fund of $250,000 per claim or $750,000 in the aggregate. The Guerras alleged that the Debtor had not established the required fund and thus would not be able to pay the malpractice judgment against him. The Guerras essentially alleged that they had a non-dischargeable claim against the Debtor for the amount of the required claims fund to apply to the malpractice award.

More specifically, the Guerras asserted that their claim was non-dischargeable pursuant to § 523(a)(4) of the Bankruptcy Code. See 11 U.S.C. § 523(a)(4). Section 523(a)(4) provides that debts "for fraud or defalcation while acting in a fiduciary capacity" are non-dischargeable.¹

On March 21, 2001, the bankruptcy court entered an order abating the adversary proceeding pending the resolution of the state court litigation. On September 9, 2002, the Debtor filed a motion to dismiss the Guerras' adversary complaint for failure to state a claim upon which relief could be granted or, in the alternative, for summary judgment. The Debtor argued, inter alia, that Florida Statutes § 458.320 is a regulatory statute and does not create a fiduciary duty or any technical trust between the Debtor and the Guerras, and thus the § 523(a)(4) exception to discharge does not apply to any debt between the Debtor and the Guerras.² After a hearing, the bankruptcy court granted the Debtor's motion to dismiss under Federal Rule of Civil Procedure 12(b)(6) for failure to state a claim upon which relief could be granted.

The Guerras appealed the bankruptcy court's dismissal to the district court, and the district court affirmed. The Guerras now appeal to this Court.

II. DISCUSSION

The Florida Financial Responsibility Act, Florida Statutes § 458.320, requires that to obtain a license a physician must maintain either malpractice insurance, or a letter of credit payable to the physician, or an escrow account of his own funds to demonstrate his financial responsibility in the event of a malpractice award against him. See Fla. Stat. § 458.320(1). As did the bankruptcy court and the district court, we accept the allegations of the Guerras' adversary complaint as true and will assume that the Debtor failed to comply with his obligations under § 458.320 and that there is no claims fund, malpractice insurance, or letter of credit to satisfy a portion of the Guerras' $4.2 million judgment against the Debtor.³

Further, the Guerras' adversary complaint is not based on the Debtor's failure to obtain malpractice insurance or provide a letter of credit, but is based solely on the Debtor's not having established a claims fund under § 458.320 that could then be used to pay the Guerras' malpractice judgment. Thus, the only issue in this appeal is whether the Debtor's failure to maintain the claims fund under § 458.320 created a debt that falls within the § 523(a)(4) exception to discharge for debts for "defalcation while acting in a fiduciary capacity." We first review prior judicial interpretation of the § 523(a)(4) exception and then apply it to this case.

A. Non-dischargeable Debts Under § 523(a)(4)

An individual debtor's pre-bankruptcy debts, including malpractice debts are generally dischargeable in a Chapter 7 bankruptcy case, and exceptions to discharge are construed narrowly. 11 U.S.C. § 727(a), (b); Equitable Bank v. Miller (In re Miller), 39 F.3d 301, 304 (11th Cir.1994) ("[C]ourts generally construe the statutory exceptions to discharge in bankruptcy liberally in favor of the debtor and recognize that the reasons for denying a discharge must be real and substantial, not merely technical and conjectural.") (quotation marks, citations, and punctuation omitted); see also R.E. Am., Inc. v. Garver (In re Garver), 116 F.3d 176, 179 n. 6 (6th Cir.1997) (noting that all types of professional malpractice claims generally are dischargeable under the Bankruptcy Code).

Although § 523(a)(4) establishes an exception to dischargeability for debts for "defalcation while acting in a fiduciary capacity," this exception is a narrow one. "The Supreme Court has consistently held that the term `fiduciary' is not to be construed expansively, but instead is intended to refer to `technical' trusts." Quaif v. Johnson, 4 F.3d 950, 953 (11th Cir.1993) (citing Davis v. Aetna Acceptance Co., 293 U.S. 328, 55 S.Ct. 151, 79 L.Ed. 393 (1934), and other Supreme Court cases interpreting previous versions of the § 523(a)(4) exception, but noting that all versions have referred to "defalcation" and to "fiduciary capacity" or "fiduciary character"); see Commonwealth Land Title Co. v. Blaszak (In re Blaszak), 397 F.3d 386, 391 (6th Cir.2005) (noting that the term "fiduciary capacity" is construed more narrowly in the context of § 523(a)(4) than in other circumstances); see also Lee-Benner v. Gergely (In re Gergely), 110 F.3d 1448, 1450-51 (9th Cir.1997) (noting that the doctor-patient relationship does not create a fiduciary relationship for purposes of § 523(a)(4)).

In Quaif, this Court further noted that the 1934 Davis decision is the last Supreme Court case to speak to the issue and that the Supreme Court has left "the lower courts to struggle with the concept of `technical' trusts." Quaif, 4 F.3d at 953. Quaif also discussed the trends in judicial interpretation of the § 523(a)(4) exception and noted that courts seemed to include the voluntary, express trust created by contract within the scope of "fiduciary capacity" as used in § 523(a)(4). Id. In contrast, courts have excluded the involuntary resulting or constructive trust, created by operation of law, from the scope of the exception. Id. Additionally, Quaif noted that cases have "also articulated a requirement that the trust relationship have existed prior to the act which created the debt in order to fall within the statutory [fiduciary capacity] exception." Id. (citing Matter of Angelle, 610 F.2d 1335 (5th Cir.1980)). Accordingly, "constructive" or "resulting" trusts, which generally serve as a remedy for some dereliction of duty in a confidential relationship, do not fall within the § 523(a)(4) exception "because the act which created the debt simultaneously created the trust relationship." Id. (emphasis added).⁴

Even if a fiduciary relationship exists prior to the act that created the debt, the next question under § 523(a)(4) is whether there was a "defalcation" while acting in a fiduciary capacity. In Quaif, this Court further explained that "`[d]efalcation' refers to a failure to produce funds entrusted to a fiduciary," but that "the precise meaning of `defalcation' for purposes of § 523(a)(4) has never been entirely clear." Id. at 955. Quaif observed that the best analysis of "defalcation" is that of Judge Learned Hand in Central Hanover Bank & Trust Co. v. Herbst, 93 F.2d 510 (2d Cir.1937), in which "Judge Hand concluded that while a purely innocent mistake by the fiduciary may be dischargeable, a `defalcation' for purposes of this...